Friday, January 16, 2009

I Fear for My Country

American politics goes through cycles. During the Revolutionary War, the nation issued Continentals to finance its efforts, and was unable to back them up. The result was a hyper-inflation that rendered the Continentals valueless. The government never made good on them. Subsequently, the public was conscious of inflation, and the Second Bank of the United States, while corrupt, did not pursue an inflationary policy. Nevertheless, Andrew Jackson did not renew its charter and closed the bank. Unfortunately, this inadvertently led to an inflation because the state chartered banks lent aggressively. In the end, the gold standard proved resilient to inflation, but the Civil War led to the issuance of greenbacks. The greenbacks led to inflation. In the post Civil War period the government decided to withdraw the greenbacks, but rather than adopt a bi-metallic standard as had existed prior to the Civil War, only gold was monetized. This led to a deflation, which caused resentment among land owners (farmers), silver miners and other special interests. The deflation issue came to a head in 1896, when the "Populist" movement was defeated. Historians can hem and haw about the role of tariffs in this, but if the public had badly wanted to adopt a silver standard, Bryan would have been elected. Contrarily, Bryan ran twice more and was defeated every time. So Populism did not win the hearts of the working man, or of the general public.

Despite the defeat of bimetallism, Woodrow Wilson pushed for adoption of the Federal Reserve during Christmas week of 1913. The act was posed as a technical banking law. It was passed soon after JP Morgan's death in 1913. The public did not get to vote on it, and it is likely that even Woodrow Wilson did not totally understand that he was taking steps that would lead to the gold standard's abolition. Thus, the public never got to vote on the question of hard money, and was unaware that the chief step to abolish it had been taken by Congress and Wilson.

For the next twenty years the gold standard remained in place and the Republican administrations that followed Wilson continued relatively hard money policies. There was an inflation much like the Revolutionary and Civil War inflations during World War I, and then the Fed popped the bubble around 1920, resulting in a depression. Subsequently there was a mildly expansionist monetary policy, which led to the stock market increases in the 1920s. In the late 1920s the Fed popped the bubble again, but this time there was a different response.

The difference between the 1930s and the 1920s response to the stock market bubbles may have been due to public indebtedness. During the 1920s car loans and buying stocks on margins had become prevalent. Also, other kinds of buying on time had become more prevalent. People may have been stretched to a somewhat greater degree than previously. In any case, the high unemployment that followed the 1929 crash created much greater public protest than previous cutbacks. Consumerism may have created additional risks.

Rather than treat the new unemployment problem as just that and stabilize the money supply, the Fed first increased credit availability in the early 1930s and then in 1935-6 tightened again, resulting in a second round of unemployment. First, the banking and media interests had emphasized the dire problem of unemployment, then the Fed ignored it.

In the 1940s there was a new round of inflation and stimulus as the federal government borrowed heavily and also expanded the money supply during World War II. The post-war inflation bubble was never really popped. The emphasis had become heavily weighted toward full employment, and the slightest reduction in monetary expansion became known as a recession.

The problem with hyper-inflation is (a) savers are harmed; (b) savers will respond by withdrawing capital from investment uses and depositing it in foreign countries, gold and commodities; (c) businesses have more difficulty planning, so innovation is squashed even more than it has been since World War II; (d) as a result of volatility and withdrawal of investment, unemployment rises (the bugaboo returns, now created by the policies meant to curtail it); (e) trust in government evaporates as the public realizes that money is deceptive (this is already true, but the propagandists of the state, aka the "mainstream media" have been able to hold the line since 1980); (f) the result is economic decline and instability. Capitalism and greed are blamed and further steps are taken to disrupt innovation.

The current "crisis" reflects many decades of bad policy and bad economic thinking. It can be viewed in two different ways, and much depends on public reaction to the Bush-Obama inflation that will result.

1. Will the public demand a monetarist response to inflation much as it did after the Revolutionary War, the Civil War, and 1979-80, and so elect an advocate of the free market? This time, hopefully, there will be one with cajones who actually will reduce the scope of government, unlike Ronald Reagan.

2. Or, will the public believe the pissant propagandists, their socialist masters on Wall Street and their current puppet, President Obama, and demand ever greater subsidies to business, to Wall Street and increasing government control with the puppet masters, the big Wall Street banks, pulling the strings?

Given America's terrible education system, Americans today lack the ability to think clearly. I am not certain that America will opt for choice 1. It has allowed things to get this bad through self indulgence. I am not certain that the road to tyranny is reversible.

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Mitchell Langbert

About Me

I have researched and written about employee benefit issues and in my previous life was a corporate benefits administrator. I am currently associate professor of business at Brooklyn College. I hold a Ph.D. from the Columbia University Graduate School of Business, an MBA from UCLA and an AB from Sarah Lawrence College. I am working on a project involving public policy. I blog on academic and political topics.